What does the Moody's Analytics model use as equivalent to holding a call option on the assets of the firm?

Question

Quizplus · Accepted Answer

Holding a call option on the assets of a firm gives the holder the right, but not the obligation, to buy the underlying assets at a predetermined price. Similarly, the value of equity in a firm represents the residual ownership interest in the assets of the firm, after all liabilities have been paid off. Therefore, the value of equity can be seen as equivalent to holding a call option on the assets of the firm.

What Does the Moody's Analytics Model Use as Equivalent to Holding